The IRS audits working families claiming tax credits at five times the rate of everyone else, according to Syracuse University's TRAC analysis of IRS data. Meanwhile, audit rates for millionaires have collapsed by 80 percent over the past decade, even as the number of millionaires grew by 50 percent.
This isn't bureaucratic dysfunction. It's the predictable result of systematic defunding and decades of lobbying that have shaped how enforcement resources get allocated.
But you wouldn't know that from the political debate, which focuses on agency "size" and "87,000 new agents" while carefully avoiding the question that matters: who actually faces scrutiny, and who doesn't?
This is how the extraction pattern operates in tax enforcement.
The enforcement gap isn't subtle. It's documented.
Low-income families claiming the Earned Income Tax Credit are the agency's most frequent audit targets. These are working families, the kind who took second jobs to pay their bills. The credit exists specifically to make work pay better than welfare. The IRS treats its recipients as prime suspects.
Meanwhile, according to IRS data analyzed by the Tax Policy Center, the audit rate for taxpayers with income above $1 million dropped from 7.2 percent on 2011 returns to 1.6 percent on 2018 returns. In absolute terms, audits of millionaires fell from 40,965 in 2012 to 11,331 in 2020. The number of millionaire returns increased by 50 percent over that period. The IRS response was to audit fewer of them.
This isn't about fraud rates. It's about cost. Auditing a working family claiming the EITC is cheap. A computer flags a discrepancy, generates a letter, demands documentation. No specialist required. Auditing a millionaire requires forensic accountants who can trace income through layers of entities. It takes years, not weeks. It requires the willingness to face the cottage industry that wealthy interests can afford: tax attorneys, wealth advisors, and specialized accountants who bill more per hour than an IRS auditor makes in a day.
A single mother gets a letter demanding she prove her child lived with her. A millionaire whose entities reported millions less than actual income? The agency doesn't have the staff to find out.
The enforcement collapse extends beyond individual tax returns. For the most complex business structures, the IRS has effectively stopped trying.
When a partnership earns income, it doesn't pay taxes directly. Instead, it issues each partner a Schedule K-1 reporting their share, which passes through to their individual return. The partnership itself files no tax. For a large partnership with thousands of partners, income can flow through multiple layers of entities before reaching a taxable person, if it ever does.
This is not an accident of tax law. Subchapter K, which governs partnership taxation, is widely considered the most complex area of the federal tax code. Wealthy interests and their advisors didn't stumble into these structures. They chose them precisely because they were the part of the code regulators couldn't follow.
The numbers tell the story. According to the Government Accountability Office, the number of large partnerships (those with $100 million or more in assets and 100 or more partners) increased nearly 600 percent between 2002 and 2019, growing from roughly 3,500 to over 20,000. Over that same period, the IRS lost roughly 30 percent of its enforcement staff due to budget cuts and attrition.
By 2019, the audit rate for these large partnerships had plummeted to 0.3 percent. For pass-through businesses with more than $10 million in assets, the rate fell from 3.8 percent in 2010 to 0.1 percent in 2019, according to IRS data. The agency conducted just 54 audits of large partnerships in all of 2019.
Even when the IRS did audit these structures, they often came away empty-handed. More than 80 percent of partnership audits resulted in "no change" to the return, according to the GAO. Not because nothing was owed, but because the structures were too complex for agents to trace the money before the statute of limitations expired. Complexity became a weapon: run out the clock.
The largest corporations fared similarly. Audit rates for corporations with over $20 billion in assets dropped from 84.5 percent to 57.2 percent over the same period.
Congress acknowledged the problem in 2015, passing the Bipartisan Budget Act to allow audits at the partnership level rather than requiring the IRS to pursue each partner separately. Under the old rules, a partnership with 10,000 partners meant 10,000 separate audits. The fix took until 2018 to go into effect and years longer to fully implement. By then, the number of large partnerships had already exploded. The agency is still catching up to structures that proliferated precisely because they were audit-proof.
The IRS has recently launched initiatives to address this gap, including targeting 75 of the largest partnerships for intensive review. Whether these efforts survive ongoing budget pressure remains uncertain.
About 15 percent of federal taxes owed go uncollected every year. The IRS projects this "tax gap" reached $696 billion in 2022, with a net gap of $606 billion after late payments and enforcement efforts.
Where does this gap come from? According to Treasury Department analysis, the top 1 percent of taxpayers account for more than $160 billion in annual noncompliance. That's roughly 23 percent of the entire gap.
The pattern is structural. According to IRS research, wage income (where employers report everything and withhold taxes automatically) has a noncompliance rate of about 1 percent. Pass-through business income from LLCs, partnerships, and S-corporations with no automatic verification has noncompliance reaching 55 percent.
For wage earners, tax compliance isn't optional. The money is withheld before the paycheck arrives. For those with pass-through income structures, compliance is essentially voluntary. When avoidance is impossible for workers and effortless for wealth, the gap isn't an accident. It's architecture.
This isn't about tax complexity. It's about verification. When the IRS can check your numbers, people pay. When they can't, "sophisticated" taxpayers don't.
Now here's what makes this indefensible:
Research from Harvard's Policy Impacts lab found that every dollar spent auditing high-income taxpayers returns $12 to the Treasury. Every dollar spent auditing below-median income taxpayers returns $5, less than half. Yet the IRS concentrates its audit resources at the opposite end of the income spectrum.
The agency is spending more resources on less productive enforcement while the most productive enforcement goes unfunded.
At a moment when the political debate is dominated by concerns about deficits and government spending, and services for working Americans are being cut, there's more than $600 billion in taxes owed but uncollected every year, disproportionately from the wealthiest taxpayers. This isn't a mystery requiring investigation. The enforcement gap is documented, the return on investment for closing it is proven, and the choice to leave it open is deliberate.
The enforcement gap isn't a management failure. It's the predictable result of specific policy choices, shaped by decades of lobbying from those who benefit from it.
The defunding spiral. Congress controls the IRS budget. The agency lost roughly 17,000 enforcement staff between 2010 and 2023 as its budget was cut in real terms. Fewer specialists means fewer complex audits. Fewer complex audits means sophisticated evasion goes undetected. Undetected evasion teaches the wealthy that non-compliance is profitable.
Here's the structural point: when you maintain automated audits targeting wages (1 percent noncompliance) while defunding complex audits targeting pass-through income (55 percent noncompliance), the beneficiaries are, by default, those with sophisticated income structures. You don't have to design the system to favor wealthy interests. You just have to defund the capacity to audit them.
The lobbying loop. Those who benefit from the enforcement gap fund campaigns. Those campaigns elect legislators who write more loopholes and defund the agencies that might enforce what remains. The decline in corporate and partnership audits didn't happen in a vacuum. It happened while lobbying by beneficiaries of those structures reached record levels.
The reform that almost was. The Inflation Reduction Act of 2022 attempted to address the enforcement gap, providing $45.6 billion for IRS enforcement through 2031. The agency used the funding to hire specialists and launch new initiatives targeting wealthy taxpayers and complex partnerships. By early 2025, the IRS reported collecting over $1 billion from delinquent millionaires — proof that enforcement works when resourced.
The counter-mobilization was swift. Congress rescinded $1.4 billion in 2023 and agreed to cut an additional $20 billion in future funding. The IRS's pledge to increase large partnership audits from 0.1 percent to 1.0 percent by 2026 is now described as "at risk." This is the pattern: reforms that acknowledge the problem pass with little fanfare, then die quietly in appropriations battles that most voters never hear about. The cuts get framed as protecting taxpayers from an overreaching agency — never mentioning that the enforcement being cut was never aimed at them.
The hidden ROI. When the IRS collects additional taxes, the revenue goes to Treasury. It doesn't show up as an agency budget win. But when Congress cuts IRS funding, it looks like savings, even when every dollar cut costs the government $5-12 in uncollected revenue, according to Congressional Budget Office estimates. The return on investment is real; the political optics make it invisible.
The complexity lobby. The average American spends 13 hours and $290 on tax compliance each year, according to the National Taxpayers Union Foundation. That adds up to 7.1 billion hours and $464 billion nationally. In most developed nations (Estonia, the UK, Japan) the government sends citizens a pre-filled return. The IRS has the data to do this for most Americans. It doesn't, because companies like Intuit and H&R Block have spent over $90 million lobbying to prevent it, according to OpenSecrets analysis.
The same automatic reporting that already achieves 99 percent compliance on wages could make filing itself frictionless for most taxpayers. That would free agency resources for the complex enforcement where the real noncompliance, and the real return on investment, actually occurs.
When the IRS launched a Direct File pilot in 2024 to let some taxpayers file for free, Intuit called it a "scheme." The company that made billions selling tax software to navigate complexity it helped preserve called a free government option "a solution in search of a problem."
The irony cuts deeper. H&R Block and Intuit sell complexity navigation to working Americans for hundreds of dollars. The same service for wealthy interests (tax attorneys, wealth advisors, specialized accountants) costs thousands, but returns millions. Both industries profit from friction. The difference is scale: one helps workers comply with rules they can't escape; the other helps wealth avoid obligations the system makes optional.
The real innovation isn't in productivity or technology. It's in avoidance architecture — structures designed to make obligations disappear.
The real conflict of interest isn't the IRS helping people file. It's an industry whose business model depends on manufactured friction, complexity that serves no citizen but generates billions in fees.
The political conversation about the IRS has been carefully constructed to avoid the questions that matter.
When "87,000 new agents" becomes the headline, we're arguing about headcount, not about who those agents would audit. When politicians promise to "defund the IRS," they're never asked: which enforcement would you cut? The automated letters to working families, or the complex investigations that have been systematically abandoned?
The framing is deliberate. Make the IRS the villain. Tap into the real frustration of taxpayers who already spend hours trying to comply, who wait weeks for refunds, who feel like the system works against them. Make every enforcement expansion sound like more hassle for people already doing their best. Never mention that the agency audits the poor at higher rates than the rich. Never mention that the wealthy benefit from an enforcement gap that lobbying has helped create.
Questions we're encouraged to ask:
• Should the IRS be bigger or smaller?
• Is the IRS too powerful?
• Are agents armed?
Questions we're not supposed to ask:
• Who actually gets audited?
• Why do EITC recipients face more scrutiny than millionaires?
• Why did partnership audits collapse to near zero while partnerships exploded in number?
• Who benefits from the enforcement gap, and who funds the campaigns that preserve it?
When the debate happens on the wrong terrain, those who benefit from the gap win before the argument starts.
Each round of this cycle makes the next round worse.
Budget cuts weaken the agency's capacity to pursue complex cases. Without specialists, sophisticated evasion goes undetected. Without enforcement, the wealthy learn that non-compliance is profitable. As the tax gap widens, revenue falls. As revenue falls, the deficit grows. As the deficit grows, pressure mounts to cut agency budgets further.
Meanwhile, the wealth that escaped taxation compounds. The political influence it purchases grows. The campaigns it funds elect legislators who write more loopholes and defund the agencies that might enforce what remains.
The shifts we've documented aren't stability. They're a deliberate departure from how the system operated within living memory.
This isn't about what tax rates should be. Corporate rates and effective rates on the wealthiest are at historical lows. Loopholes that supermajorities of Americans support closing (carried interest, stepped-up basis) remain open and have expanded. Those are important questions that deserve their own treatment.
The question here is narrower: does the system collect what the law currently says is owed?
Right now, it doesn't, and it doesn't selectively. Working families face full enforcement on income with 1 percent noncompliance. Wealthy interests face declining enforcement on income with 55 percent noncompliance.
Even those who believe taxes should be much lower have reason to object to this arrangement. A system that disproportionately targets working families while abandoning complex audits isn't implementing "smaller government." It's implementing government that works for some and against others. If the argument is that everyone should pay less, the current system delivers the opposite: it taxes work at full compliance while shielding wealth from the rates already on the books.
Enforcement that matches where the noncompliance occurs. Specialists who can follow the money through pass-through entities and offshore structures. An agency resourced to pursue complex evasion, not just automated letters to the working poor.
And yes, a simplified system that doesn't require Americans to spend 7 billion hours and nearly half a trillion dollars feeding an industry that exists only because complexity is profitable for someone.
None of this is extreme. It's what a functional system would look like, and what the American system looked like more recently than most people realize. The shift away from that norm was deliberate, documented, and funded.
That's the debate you're not supposed to have.
It's time to have it anyway.
Audit Rate Disparities
Syracuse University's Transactional Records Access Clearinghouse (TRAC) analysis of IRS data found that low-income EITC claimants are audited at approximately five times the rate of other taxpayers. The Tax Policy Center's analysis of IRS data shows millionaire audit rates dropped from 7.2% (2011 returns) to 1.6% (2018 returns), a decline of approximately 80%. TRAC reported that audits of millionaires fell from 40,965 in 2012 to 11,331 in 2020, while the number of millionaire returns increased by 50%.
Partnership and Complex Entity Audits
U.S. Government Accountability Office (GAO-23-106020, July 2023) found that large partnerships (those with $100 million or more in assets and 100 or more partners) increased nearly 600% between 2002 and 2019, from roughly 3,500 to over 20,000. The IRS conducted just 54 audits of large partnerships in 2019, a rate of approximately 0.3%. More than 80% of partnership audits resulted in "no change" to the return. IRS data shows pass-through businesses with $10 million+ in assets saw audit rates fall from 3.8% (2010) to 0.1% (2019). Audit rates for the largest corporations (over $20 billion in assets) dropped from 84.5% to 57.2% over the same period. Sarin, N. & Sayed, S. (2024), "Broken Budgeting," Yale Budget Lab, provides additional analysis of the resource-complexity gap.
Tax Gap Data
IRS projections for Tax Year 2022 show a gross tax gap of $696 billion (approximately 15% of taxes owed) and net tax gap of $606 billion. Treasury Department analysis estimates the top 1% of taxpayers account for more than $160 billion in annual noncompliance, roughly 23% of the total gap. IRS research shows wage income (with third-party reporting and withholding) has approximately 1% noncompliance, while pass-through business income with no third-party reporting has noncompliance reaching 55%.
Enforcement ROI and Staffing
Research from Harvard's Policy Impacts lab (Boning et al. 2023) found returns of $12 for each dollar spent on audits of high-income individuals versus $5 for audits of below-median income individuals, making high-income audits nearly 2.5 times more productive per dollar spent. Congressional Budget Office estimates IRS enforcement ROI at $5-9 per dollar at peak productivity. The IRS lost approximately 17,000 enforcement staff between 2010 and 2023, with enforcement funding and staff declining roughly 30% over this period according to CBO analysis.
Tax Compliance Burden
National Taxpayers Union Foundation 2025 analysis finds the average American spends 13 hours and $290 on tax compliance annually, totaling 7.1 billion hours and $464 billion nationally (including $316 billion in lost productivity and $148 billion in out-of-pocket costs). Tax Foundation analysis found total compliance costs of $546 billion, nearly 2% of GDP.
Tax-Prep Industry Lobbying
OpenSecrets analysis documented $90 million in lobbying by tax prep companies and advocacy groups since the Free File Program's 2003 inception. Intuit alone spent $44.8 million on federal lobbying since 1998 and a record $3.7 million in 2024. ProPublica investigations documented that Intuit and other Free File Alliance members blocked their free options from search results while lobbying to prevent government-provided free filing.
Partnership Audit Reform
The Bipartisan Budget Act of 2015 replaced the TEFRA partnership audit rules with a centralized regime allowing audits at the partnership level rather than requiring separate audits of each partner. The new rules took effect for tax years beginning January 2018.
IRA Funding and Rescissions
The Inflation Reduction Act of 2022 provided the IRS with $45.6 billion for enforcement activities through fiscal year 2031. By early 2025, the IRS reported collecting over $1 billion from delinquent millionaires using IRA-funded initiatives. However, $1.4 billion was rescinded in 2023, with an additional $20 billion in agreed future cuts. The IRS's goal to increase large partnership audit rates from 0.1% to 1.0% by 2026 is now described as "at risk" according to agency assessments. The IRS Large Partnership Compliance (LPC) program has targeted 75 of the largest partnerships (averaging $10 billion in assets) for intensive review.
Framework & Methodology
The five-component extraction framework (rule-writing capture, rule-interpretation capture, rule-enforcement capture, narrative capture, and compounding loops) is developed in The Extraction Machine, Cambium Institute, 2026.
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